Fall from fiscal cliff would rough up LI

David Kahn said he fears his income and David Kahn said he fears his income and Social Security taxes will go up by thousands of dollars. (Nov. 9, 2012) Photo Credit: Steven Sunshine

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Long Island would get battered if the country falls off the fiscal cliff.

That cliff is a combination of big federal tax hikes -- as a number of tax breaks from the George W. Bush and Barack Obama eras expire on Dec. 31 -- and deep federal spending cuts set to take effect on Jan. 1.

Should a divided Congress and the president fail to make adjustments soon to avoid the fiscal cliff, some experts say, the U.S. economy -- and Long Island's -- would likely plunge into another recession from the shock. The Congressional Budget Office, in a recent report, estimated that GDP would drop by half a percentage point next year, and unemployment rise to 9.1 percent, if nothing is done.

Tax cuts totaling more than $500 billion in 2013 will expire at the end of the year, effectively raising household taxes next year by an average $3,500, according to the Tax Policy Center, a nonpartisan group in Washington, D.C.

Another blow: $1.2 trillion in automatic spending cuts, or "sequestrations," to the federal budget over nine years beginning in 2013 and evenly split between defense and nondefense funding.

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Long Island's defense companies face the possibility of deep cuts in federal work.

And federal spending cuts could mean the loss of tens of millions of dollars in research and other funding to LI's scientific institutions and universities.

Here are more details of what the Island could face if Congress fails to come up with an alternative to the fiscal cliff:

Taxes. Almost everyone who works would feel the expiration of the payroll tax cut for Social Security that was part of President Obama's 2009 economic stimulus package. Under that cut, wage earners have paid 2 percent less on their first $110,100 of income. For people making $50,000 a year, that will mean taking home $1,000 less next year, or $19.23 less each week.

The other looming federal income tax hike: the Jan. 1 expiration of tax cuts signed by President George W. Bush in 2001, which reduced rates across the board.

According to the Tax Policy Center, the tax rate would increase for all income levels except for those paying 15 percent. The lowest rate, 10 percent, would go up to 15 percent; the 25 percent rate -- for those with taxable incomes between $36,150 and $87,550 -- would go up to 28 percent; and the highest rate would rise from 35 percent to 39.6 percent. Income on investments would face higher taxes as the top rate returns to 20 percent from 15 percent.

The average tax increase for people in the bottom 20 percent of income would be $412, while the top 1 percent would see their taxes go up by an average $120,537, the Tax Policy Center said in a report.

David Kahn proprietor of a tutoring business called KahnTest in Stony Brook and Manhattan, said he fears his income and Social Security taxes will go up by thousands of dollars.

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"I'm not happy about it," Kahn said, "but I recognize it may be necessary to reduce the deficit and debt."

Another tax that could hit more Long Islanders is the alternative minimum tax, a parallel tax system intended to make sure that the wealthiest pay taxes even if deductions and tax credits reduced their tax bill to zero. The tax -- a version of which was instituted in 1969 -- wasn't indexed to inflation.

The last "patch" to adjust the AMT for inflation expired last year. So a lower threshold for the AMT would mean more people would pay more on 2012 tax bills due in April 2013, and then in following years..

Long Island residents generally make more money than other residents in the state. New York median household income is $55,246; it's $91,414 in Nassau and $84,106 in Suffolk, according to U.S. Census estimates for 2011. So the AMT already bites deep here.

Long Islanders paid $1.93 billion under the alternative minimum tax in 2008, according to Internal Revenue Service data, or 50.9 percent of the $3.8 billion that New York residents paid.

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"People who don't think of themselves as wealthy, are going to find that they are suddenly swept into this alternative minimum tax," said Nigel Gault, an economist at the forecasting firm IHS Global Insight.

Companies. Long Island's aerospace and defense companies, some of whom obtain almost all of their revenue from government work, said uncertainty about the fiscal cliff is already taking a toll. Local companies have seen signs of slowing orders as the Defense Department grapples with the prospect of deep budget cuts.

Long Island has about 800 aerospace and defense manufacturers, about a quarter of the manufacturing companies here, said the Long Island Forum for Technology.

August Bricker, chief operating officer of Brentwood-based B & B Precision Components Inc., said, "I'm not seeing a lot of new [contracts] coming in."

So the five-employee company, which derives about 75 percent of its revenue from government contracts, is delaying purchases of much-needed replacement equipment and putting off hiring two or three more skilled machinists.

Joe Spinosa, vice president of business development at East/West Industries Inc., of Ronkonkoma, has put on hold plans to add five to eight more people to its staff of 50 "because of the risk that may be associated with the cancellation" of contracts. The company makes crash-absorbing helicopter seats and emergency oxygen systems, and military contracts account for 90 percent of revenues.

Institutions. Nationally, the fiscal cliff would slice nondefense discretionary spending by 8.2 percent. Long Island's scientific, educational and research institutions would be affected.

Cold Spring Harbor Laboratory, which conducts medical research, said it could lose $4.1 million out of a $100-million research budget. "We will not be able to do the amount of in-depth research that we want to do," said David Spector, research director.

Stony Brook University said it faces more than $12.3 million in cuts to federally funded research and education programs next year, which would result in "lost research opportunities" and fewer trained scientists.

Brookhaven National Laboratory, in Upton, gets about 95 percent of its $696.4-million budget from federal funding, and it is "watching the situation in Washington," spokesman Peter Genzer said.

The Albany-based nonprofit Commission on Independent Colleges and Universities estimated that 6,500 students across the state could lose federal work-study jobs and grants could be cut for 7,000 low-income college students.

Long Island's hospitals face an automatic 2 percent cut to Medicare reimbursements -- federal health insurance for seniors. At the sprawling North Shore-Long Island Jewish Health System, a $40-million cut in Medicare payments in its $6.7-billion budget could force a reduction in health screenings and educational programs, spokesman Terry Lynam said.

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